Workers' compensation insurance provides financial protection when employees get injured at work. It covers lost wages and medical costs. The coverage protects you from workplace injury lawsuits while ensuring your workers get the necessary care. Premiums are based on your payroll per $100 of wages.
What Is Workers' Compensation Insurance and What Does It Cover?
Workers' compensation insurance provides financial protection for businesses and workers by covering medical bills and lost wages from work-related injuries.
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Updated: October 17, 2025
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What Is Workers Compensation Insurance: Key Takeaways
Workers' compensation insurance covers medical bills and lost wages for workplace injuries, but excludes intentional injuries and intoxication accidents.
Workers' compensation policies include two main coverage types: Coverage A provides unlimited medical benefits and wage replacement. Coverage B provides employer liability protection against employee lawsuits.
In most states, workers' compensation insurance is required for businesses with employees. State requirements vary by employee count and industry.
What Is Workers' Compensation Insurance?
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Workers’ Comp Insurance Coverage Types and Terms
A workers' compensation policy has multiple parts:
Workers’ compensation coverage A (employee benefits)
Covers all medical costs and replaces lost wages as your state requires. You can't adjust these amounts because state law sets them based on the employee's wages and injury severity.
Workers’ compensation coverage B (employers' liability)
Protects your business from employee lawsuits with three adjustable limits: bodily injury per accident, disease policy limit and disease per employee. Workers' compensation coverage B limits vary by insurer, and you can increase them for additional lawsuit protection.
Workers' compensation insurance deductibles
The amount you pay out-of-pocket before insurance coverage begins. Most standard workers' compensation policies have no deductibles, but larger businesses can choose deductible policies to reduce their premium costs.
Workers' comp experience modification rate (EMR)
Adjusts your premium up or down based on your claims history compared to similar businesses. A score below 1.0 cuts your premium costs, while a score above 1.0 increases them. New businesses start at 1.0 until they accumulate three years of claims data for accurate scoring.
Industry classification code
Sets your base premium rate per $100 of payroll. Construction and manufacturing pay higher rates due to injury risks, while office work pays lower rates. Your insurer assigns codes based on what your business actually does, not what you call it.
Workers' compensation premium audits
Your insurer reviews your actual payroll annually to calculate your final premium. You'll receive a bill or refund based on the difference between estimated and actual payroll. Separate your payroll records by job type to avoid surprise charges when the auditor visits.
Workers' comp is a no-fault system
Workers' comp ensures workers get benefits regardless of who caused the accident and protects you from most workplace injury lawsuits. This trade-off speeds up claims without lengthy court battles over who's to blame.
What Does Workers' Compensation Cover?
Workers' compensation covers medical expenses, lost wages, disability benefits and other costs when employees are injured at work or develop job-related illnesses. Coverage varies by state, but most policies cover the following:
Workers' Comp Claim Type | Covered? | Example Scenarios |
|---|---|---|
Medical expenses for work injuries | Yes | During a busy dinner rush, your restaurant cook burns his hand on the grill. Workers' comp covers the emergency room visit and follow-up doctor appointments. |
Intentional self-injury | No | An employee deliberately hurts themselves, hoping to get time off work. This isn't covered because the injury was intentional. |
Lost wages during recovery | Yes | Your construction worker breaks their leg at the job site and can't work for six weeks. They'll get about two-thirds of their usual paycheck. |
Injuries while intoxicated | No | A worker shows up drunk and falls off a ladder. Since alcohol caused the accident, workers' comp won't cover this injury. |
Permanent disability from work accident | Yes | Your factory worker loses a finger in machinery. They receive ongoing monthly payments based on how much the injury affects their ability to work. |
Commuting accidents | No | An employee gets in a car crash driving to work in the morning. Since it happened off your property, it's not a workers' comp claim. |
Death from workplace accident | Yes | A delivery driver dies in a work-related vehicle accident. The family receives assistance with funeral costs, plus ongoing income support. |
Personal activities at work | No | Someone hurts their back playing in the optional company softball game. Since it was voluntary recreation, it's not covered. |
Physical therapy and rehabilitation | Yes | Your office worker develops carpal tunnel from typing. Workers' comp pays for physical therapy and ergonomic equipment to help them recover. |
Pre-existing medical conditions | No | A worker's chronic back problems worsen over time. Workers' comp won't cover this unless you prove work made it much worse. |
PTSD for first responders | Yes | Your security guard develops PTSD after witnessing a violent incident at work. Most states now cover counseling and therapy for this. |
Criminal activity injuries | No | An employee gets hurt while trying to steal from your cash register. Injuries during illegal activities aren't covered. |
Job-related stress and anxiety | Yes | A health care worker develops severe anxiety after repeated patient attacks. Some states are starting to cover work-related mental health issues. |
How Much Workers’ Compensation Coverage Do I Need?
Most small businesses need $1 million in employers' liability limits (coverage B), while employee benefits (coverage A) provide unlimited medical benefits as state law requires. Your coverage needs depend on state requirements, industry risk level and payroll size. Most states require coverage if you have employees, though some set minimum thresholds of three to five employees.
Who Needs Workers' Compensation Insurance?
Most businesses need workers' compensation insurance once they hire employees. Employers always pay the premiums and can't legally deduct these costs from employee wages.
Several factors determine whether your business needs coverage:
- 1
Workers' compensation insurance is required for businesses with employees
Nearly all businesses with employees, even with one to three part-time workers, need workers' compensation coverage.
- 2
State requirements for workers' compensation vary slightly by state
The minimum employee count threshold varies from one to three employees, depending on the state. Check the table below for state-specific thresholds.
- 3
Your business structure matters
Sole proprietors without employees usually aren't required to buy coverage, but partnerships, corporations and LLCs with employees need it.
- 4
There are industry-specific requirements
Construction contractors often need coverage, even without employees, while certain agricultural businesses have different requirements or exemptions outlined below.
Workers' Compensation Insurance Exemptions
Some businesses and workers can skip coverage legally, but exemptions from workers' compensation insurance carry huge financial risks.
Workers' Comp Exemption | Explanation of Workers Comp Exemption | Business Example |
|---|---|---|
Business owners | Many states allow business owners, partners and corporate officers to exclude themselves from coverage even when companies carry workers' comp for employees. | You own a small retail store with three employees and carry workers' comp for them, but you exclude yourself as the owner to save on premiums. |
Independent contractors | Misclassifying employees creates problems, but workers' comp policies don't cover true independent contractors. | You hire someone to design your website. True independent contractors aren't covered, but you'll face penalties if you treat them like employees. |
Employee count thresholds | Some states don't require coverage until you reach three to five employees, but coverage becomes required once you cross these limits. | Your landscaping business has two full-time workers in North Carolina, which requires coverage at three employees. You don't need coverage yet but will when you hire your third worker. |
Consider the financial exposure. Without workers' comp, you're personally responsible for employee medical bills, lost wages and potential lawsuits that could cost hundreds of thousands of dollars.
Workers’ Comp Insurance Requirements by State
Workers' comp requirements differ by state. Most require coverage from the first employee, while others wait until you have three to five workers. Texas and South Dakota make coverage optional for most businesses. States also differ in whether they cover part-time workers or exclude certain industries.
State | Employee Threshold | Coverage Notes |
|---|---|---|
Alabama | 5+ employees | Excludes agricultural and domestic workers |
Alaska | 1+ employees | Includes part-time workers |
Arizona | 1+ employees | Excludes sole proprietors and partners |
Arkansas | 3+ employees | Different rules for agriculture and construction |
California | 1+ employees | Includes part-time and seasonal workers |
Colorado | 1+ employees | Excludes domestic workers in private homes |
Connecticut | 1+ employees | Includes corporate officers |
Delaware | 1+ employees | Mandatory for all employee types |
Florida | 1-4+ employees | Different rules by industry |
Georgia | 3+ employees | Excludes agricultural workers |
Hawaii | 1+ employees | Includes temporary and part-time workers |
Idaho | 1+ employees | Excludes domestic workers |
Illinois | 1+ employees | Strict penalties for non-compliance |
Indiana | 1+ employees | Includes corporate officers |
Iowa | 1+ employees | Excludes agricultural employees |
Kansas | 1+ employees | All businesses need coverage |
Kentucky | 1+ employees | Includes all worker classifications |
Louisiana | 1+ employees | Excludes agricultural and domestic workers |
Maine | 1+ employees | Includes part-time and seasonal workers |
Maryland | 1+ employees | Mandatory for all businesses |
Massachusetts | 1+ employees | Includes corporate officers |
Michigan | Complex System | 1+ employee working 35+ hours/week for 13+ weeks, OR 3+ employees at one time |
Minnesota | 1+ employees | Includes temporary workers |
Mississippi | 5+ employees | Excludes agricultural and domestic workers |
Missouri | 5+ employees | Lower threshold for construction |
Montana | 1+ employees | State fund available but not required |
Nebraska | 1+ employees | Includes all employee types |
Nevada | 1+ employees | Mandatory coverage required |
New Hampshire | 1+ employees | Includes corporate officers and partners |
New Jersey | 1+ employees | Mandatory for all businesses |
New Mexico | 3+ employees | Different rules for construction |
New York | 1+ employees | Includes domestic and farm workers |
North Carolina | 3+ employees | Excludes agricultural workers |
North Dakota | 1+ employees | Monopolistic state fund |
Ohio | 1+ employees | State fund participation required |
Oklahoma | 1+ employees | Includes all worker types |
Oregon | 1+ employees | Mandatory coverage required |
Pennsylvania | 1+ employees | Must cover all employee types |
Rhode Island | 1+ employees | Includes domestic workers |
South Carolina | 4+ employees | Excludes agricultural and domestic workers |
South Dakota | Optional | No requirement |
Tennessee | 5+ employees | Excludes agricultural workers |
Texas | Optional | Businesses with government contracts need coverage |
Utah | 1+ employees | Mandatory coverage required |
Vermont | 1+ employees | Includes part-time workers |
Virginia | 3+ employees | Different rules by industry |
Washington | 1+ employees | State fund participation required |
West Virginia | 1+ employees | Private insurance system (privatized in 2005) |
Wisconsin | 3+ employees | Excludes agricultural workers |
Wyoming | 1+ employees | State fund participation available |
*Workers' compensation requirements change frequently. Check with your state's insurance department for current requirements and verify coverage obligations before making business decisions.
WORKERS' COMP INSURANCE: MONOPOLISTIC VS. COMPETITIVE STATES
North Dakota, Ohio, Washington and Wyoming are monopolistic states that require businesses to buy workers' compensation insurance through state-run programs only. Competitive states let you choose between private insurers and state funds, allowing you to shop for rates and coverage options. Monopolistic states provide streamlined coverage through their programs.
Penalties for Not Having Workers’ Comp Insurance
Operating without required workers' compensation insurance results in these penalties:
Daily fines for lacking workers' comp coverage
States impose steep daily fines for operating without coverage. Illinois charges $500 per day with a $10,000 minimum, while New York charges $2,000 for every 10 days you go without coverage. California penalties can reach $100,000.
Criminal charges in serious cases
Some states treat intentional noncompliance as a felony. Pennsylvania makes it a felony, with penalties up to seven years in prison and $15,000 in fines. California can jail you for up to one year.
Stop-work orders
Many states shut down your business immediately until you get workers' compensation coverage. You can't operate without coverage.
Personal liability
Without workers' comp, you're personally liable for all injury costs, including medical bills, lost wages and legal fees. One serious accident can cost hundreds of thousands of dollars.
Lawsuits
Injured employees can sue you directly when you don't have workers' compensation coverage, exposing you to unlimited liability instead of the protection workers' comp normally provides.
Check your state's workers' compensation board for current penalties and requirements.
Workers’ Compensation Insurance: Bottom Line
Workers' compensation insurance benefits both business owners and workers. When injured at work, workers receive medical care and wage replacement, while business owners protect themselves from workplace injury lawsuits. Most states require businesses with employees to carry coverage, especially in high-risk industries. Texas and South Dakota make it optional.
Workers’ Comp Insurance: FAQ
Here are answers to frequently asked questions about workers' compensation insurance:
What is workers' compensation insurance?
Workers' comp covers employees injured on the job. It protects business owners from workplace lawsuits and guarantees employee care regardless of fault. Coverage includes wage replacement, medical expenses, disability benefits and death benefits.
Who needs workers' compensation insurance?
Most businesses with employees need workers' compensation insurance, though requirements vary by state. Most require coverage once you hire your first employee, though some states set thresholds of three to five workers. Construction and high-risk industries often require coverage from the first hire. Texas and South Dakota don't mandate coverage.
What are the penalties for not having workers' compensation insurance?
Not having required workers' compensation insurance leads to penalties including daily fines, criminal charges, stop-work orders and personal liability for all employee injury costs, including medical bills and lawsuits.
Who pays for workers' compensation insurance?
Employers pay all workers' compensation insurance premiums. Employees don't pay premiums. Employers can't deduct costs from employee wages. Non-compliance can result in fines up to $100,000 and criminal charges.
What are workers' compensation insurance benefits for employees?
Benefits include unlimited medical coverage, wage replacement, temporary and permanent disability payments and death benefits for families. These benefits are free for employees and include rehabilitation services and job placement assistance.
How do you buy a workers' compensation insurance policy?
Employers can buy workers' compensation insurance from private insurers, state funds or brokers. Compare quotes from multiple providers to find the best rates and coverage options. Apply online or through agents. Ensure coverage starts before employees begin work.
How does workers' compensation insurance work step-by-step?
Workers' compensation follows a simple claims process:
- An employee reports a workplace injury to a supervisor.
- The employer files a claim with the insurance provider within 24 to 48 hours.
- A medical evaluation determines treatment needs.
- Benefits begin.
Most claims are completed within two to eight weeks.
What workers' compensation technology trends should I expect in 2025?
Three trends will dominate in 2025: AI-powered injury prediction, expanded telemedicine and wearable safety technology. AI reduces claim expenses through predictive analytics that forecast workplace incidents. Smart wearables monitor employee safety in real time, while automated claims processing speeds up approvals and cuts costs.
How does telemedicine work for workers' compensation claims?
Telemedicine lets injured workers get medical evaluations, diagnoses and treatment plans right away without traveling to a doctor's office. Claims move faster and cost less because workers start treatment immediately. Insurers save money through quicker claim resolution.
Does workers' compensation cover mental health conditions like PTSD?
More states now cover work-related mental health conditions beyond just first responders. New York started covering PTSD for all employees in December 2024, and Connecticut expanded its mental health coverage in January 2024.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.
sources
- California Department of Insurance. "Workers' Compensation." Accessed October 17, 2025.
- Commonwealth of Pennsylvania. "PA Workers' Compensation Employer Information." Accessed October 17, 2025.
- Connecticut General Assembly. "An Act Expanding Workers' Compensation Coverage for Post-Traumatic Stress Injuries for All Employees." Accessed October 17, 2025.
- New York State Governor Kathy Hochul. "Governor Hochul Signs New Law to Support Workers Facing Job-Related Post-Traumatic Stress." Accessed October 17, 2025.
- New York State Workers’ Compensation Board. "Violations of Workers’ Compensation Law (Liability and Penalties)." Accessed October 17, 2025.